India’s central bank has unexpectedly raised interest rates in an attempt to rein in stubbornly high consumer prices in a crucial election year.
The Reserve Bank of India (RBI) raised the benchmark repo rate – the amount at which it charges to lend to commercial banks – to 8 per cent from 7.75 per cent.
Economists had expected no change after its meeting in Mumbai on Tuesday.
The RBI said that another near-term hike was unlikely if inflation eased to a more comfortable level.
India’s main gauge of inflation, the wholesale price index (WPI), rose 6.16 per cent in December, from a year earlier. While that was a slight fall on from the previous month, the rate continues to remain an issue with the central bank.
Meanwhile, the country’s consumer prices index (CPI) – which is seen as the key gauge of inflation across most other countries – rose at an annual rate of 9.87 per cent in December.
“Inflation excluding food and fuel has also been high, especially in respect of services, indicative of wage pressures and other second-round effects,” the central bank said in a statement.
“Elevated levels of inflation erode household budgets and constrict the purchasing power of consumers. This, in turn, discourages investment and weakens growth.”
The RBI last week had proposed setting a target of 4 per cent consumer inflation by 2016.
It said that the increase in the policy rate “will set the economy securely on the recommended disinflationary path”.
RBI chief Raghuram Rajan had left rates unchanged at the bank’s last policy meeting in December, after raising the benchmark rate in September and October.
India’s main share index fell following the announcement, with lenders such as ICICI Bank leading the decline.
India has been struggling to control what is Asia’s highest inflation level, which was running at about 10% last year.
Rising prices have impeded economic growth in the country, which has also been under pressure from a weakened currency.
The Indian rupee has lost about 14 per cent of its value over the past 12 months, which has made the cost of imported products more expensive.
Higher inflation causes consumers to spend less, and its impact is felt most by India’s poor. According to the World Bank, nearly two-thirds of India’s population live on less than $2 a day.
The central bank said in its statement that “inflation is also a tax that is grossly inequitable, falling hardest on the very poor”.
Companies higher input costs have prompted some to raise prices.
Authorities have been trying to bring down prices, as inflation is also a politically sensitive issue in India.
The country is due to hold general elections in May.